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Corn crop conditions worsen, negative for fertilizer companies

Crop condition

Crop condition is an indicator published every week by the United States Department of Agriculture (USDA) during the planting and harvest season. The indicator is useful in estimating the yield that farmers will be able to harvest this year. Solid percentages often point to strong crop production, which tends to alleviate pressure on the global stock-to-use ratio—another key indicator watched by agriculture investors, analysts, and traders. On the other hand, low percentages often point to a weak production year, which can push corn prices up and increase demand for fertilizers in the following year.

Corn crop conditions worsen, negative for fertilizer companiesEnlarge Graph

Conditions remain favorable

The USDA releases crop condition updates every week on Monday, reflecting data for the previous week. For August 30, the USDA reported another decline in the percentage of corn crops in “good” and “excellent” condition. Due to late hotter and drier weather, the indicator fell from 59% in the prior week to 56%. As corn uses the bulk of fertilizers in the United States, it’s the most important crop to follow.

Favorable warm and wet weather as well as strong potash application helped push conditions to above the seven-year average earlier this year. While the condition indicator has fallen due to the late heat wave, we’re lucky we haven’t had a severe drought like last year that sent the indicator from 60% to just above 20%. Even though the late heat drove crop conditions lower, it’s helping corn grow. The wetter-than-normal summer earlier this year had slowed crop growth, but more crops are now maturing as they benefit from some sunshine, which is causing corn prices to drop slightly.

While the USDA estimated a record 13.80 billion bushels of corn output for 2013 in August1, which sent corn prices tumbling, the September’s update (to be released September 12) will be an important one for fertilizer investors to watch, as there have been a lot of changes lately.

Effect on fertilizers

While lower crop conditions have been pushing corn prices higher lately, corn prices aren’t likely to end above $6.00 per bushel this year. As the days of hot weather are now mostly behind us, crop conditions are unlikely to suffer much. So corn prices are unlikely to rise much further from here. This could negatively affect fertilizer companies such as CF Industries Holdings Inc. (CF), Potash Corp. (POT), Agrium Inc. (AGU), and Mosaic Co. (MOS) because it makes fertilizers more expensive to farmers. Retail prices for urea have started to roll over. Because demand for potash is more price-sensitive than nitrogenous fertilizers, this would negatively impact Potash Corp. (POT) and Mosaic Co. (MOS) more. The Market Vectors Agribusiness ETF (MOO), which invests in various businesses within the agriculture industry, would also be negatively affected.

  1. The United States produced 13.20 billion bushels of corn in 2009

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